Can commodity exchanges save Nigeria’s agriculture?

Two international locations — Egypt and Nigeria— account for one-third of Africa’s complete agricultural output, in accordance with McKinsey. No different nation among the many continent’s prime ten has this a lot affect. But, in some way, Nigeria’s agricultural sector is extremely underexplored. After we flip the script to measure agriculture’s contribution to every financial system, Nigeria ranks nineteenth.

Nigeria has a confirmed skill to churn out agro-products. Nevertheless it has been slower than most in turning this into an optimised worth chain. For example, Nigeria is the biggest cassava producer globally, accounting for about one-fifth (21%) of the world’s output. Nevertheless, solely 20% will get processed into higher-value merchandise.

“Lower than 2% of Nigeria’s annual finances goes into financing its worth chain,” Oluwafunto Olasemo, Vice-President, Monetary Markets at AFEX, instructed Ventures Africa in an interview. For context, members of the African Union agreed in 2003 by the Maputo Declaration to allocate a minimum of 10% of their budgets to creating worth chains for agriculture. However the governments will not be the one ones holding again. “The 2 largest spenders of the financial system —the federal government and the banks— will not be paying a lot consideration to this worth chain. Agriculture makes up lower than 5% of banks’ portfolios,” she mentioned. So the issue is just not merely negligence, however extra doubtless, threat aversion.

Agriculture is one among Nigeria’s most significant sectors but in addition one of the vital weak to dangers. In 2022, floods destroyed over 100,000 hectares of farmland. This occasion, coupled with inflation and the nation’s insecurity issues, uncovered over 25 million Nigerians to meals insecurity. And people are solely macroeconomic dangers. Issues with market construction and logistics are the explanation Nigeria loses and wastes 40% of its meals manufacturing yearly. “Folks simply haven’t discovered a solution to de-risk the sector,” Olasemo mentioned. “And it’s that perceived threat that retains traders at bay.”

Folks usually attribute Nigeria’s excessive volumes of meals waste to poor preservation. However that’s not the one motive. A big portion of meals losses occurs throughout transportation. So there may be an apparent disconnect between sellers and patrons.

Are commodity exchanges the reply?  

In 2002, a famine hit Ethiopia after two years of bumper crops. In consequence, the nation needed to search emergency meals help for 14 million folks liable to hunger. The underlying downside, nevertheless, was not meals manufacturing however distribution. Many farmers couldn’t promote their produce after they had them in abundance. So their crops grew to become wasted. This situation prompted the creation of Africa’s first commodity alternate: the Ethiopia Commodity Alternate (ECX), in 2008. 4 years later, over 2 million farmers gained entry to the markets by this alternate. Now, Ethiopia ranks third amongst African international locations when it comes to agriculture’s contribution to nationwide GDP.

In the present day, the same script is taking part in out in Nigeria. The nation is experiencing its worst meals disaster in a long time. Then this yr, AFEX, the nation’s first private-licensed commodities bourse, grew to become Africa’s fastest-growing firm. “Agriculture has constantly contributed roughly 22 to 25% to Nigeria’s GDP. So it’s not proper for the nation to not feed itself,” Olasemo mentioned. “The most effective methods to make sure that is to create an environment friendly market for producers and customers of commodities.”

A commodity alternate is a market the place patrons and sellers can commerce bodily commodities, starting from agricultural produce to pure sources, by contracts. Meaning the alternate offers a platform for these patrons and sellers to satisfy and agree on costs whereas serving to them hedge towards value dangers. This manner, each events don’t want to attend for middlemen. “Most producers are smallholder farmers, and so they want entry to off-takers,” Olasemo defined. “The off-takers (or processors) additionally want the power to combination as a lot worth as they’ll from a central location. This manner, you possibly can scale back post-harvest losses. Additionally, these smallholder farmers will not be a part of an built-in worth chain. So it’s normally tough for them to cost their commodities appropriately. However an alternate helps them with value discovery. Thirdly, it ensures standardisation and grading of [commodity] contracts.”

An ideal market?  

Ethiopia’s success story spurred many different African international locations to launch commodity exchanges. However not all of them had been profitable. For instance, the Zambia Agricultural Commodity Alternate (ZAMACE) closed down in 2012 after struggling to affect the markets. As of 2015, solely South Africa’s commodity alternate was thriving with out authorities assist. So though commodity exchanges have loads of prospects for agriculture, the markets are imperfect.

One of many challenges African commodity exchanges face is producing commerce quantity. “Exchanges want plenty of quantity. However the bigger portion of farmers perform smallholder operations. Meaning you want an infinite variety of farmers. After getting the farmers, how do you coordinate them into clusters which are significant and may fulfill market demand?” Olasemo defined.

Additionally, markets thrive when the costs favour each patrons and sellers. Nevertheless, commodity costs are sometimes unstable. Soybean, as an example, has doubled in value since 2020 within the international market. “Globally, commodity costs are unstable. Now, layer that on the truth that in Africa, there’s a fixed deficit between demand and provide. We’ve got much more unstable costs,” she mentioned.

Nevertheless, AFEX is innovating its method by a few of these challenges. “Farmers used to function in silos and had belief points on how they might profit from being a part of an built-in worth chain. However we (AFEX) rolled out initiatives like enter financing to offer credit score entry to the farmers and thru this, we now have By our enter applications, which allow inputs to succeed in producers in a well timed method backed by extension assist, yields improve from 0.6 MT/ha to 2.5 MT/ha,” Olasemo mentioned. “We’re in a position to take a look at the fungibility of commodities and create modern merchandise round them. That method, we unlock worth for the manufacturing, processing and aggregation sides of the worth chain. Our skill to assemble, interpret and distribute knowledge additionally offers us leverage.”

Policymakers are additionally changing into extra energetic within the commodities market. Not too long ago, Nigeria’s Presidency acknowledged that it’ll create and assist a Nationwide Commodity Board to evaluate and constantly assess meals costs. “We’ve seen regulatory curiosity on this sector,” Olasemo affirmed. “In the long term, our commodities market is prone to transfer in direction of what we presently have in superior markets.”